Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
Basis of Presentation. On July 15, 2019 we changed our corporate name from “KLA-Tencor Corporation” to “KLA Corporation”. For purposes of this report, “KLA,” the “Company,” “we,” “our,” “us,” or similar references mean KLA Corporation, and its majority-owned subsidiaries unless the context requires otherwise. The Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the unaudited interim financial statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair statement of the financial position, results of operations, comprehensive income, stockholders’ equity and cash flows for the periods indicated. These financial statements and notes, however, should be read in conjunction with Item 8, “Financial Statements and Supplementary Data” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, filed with the SEC on August 16, 2019.
The Condensed Consolidated Financial Statements include the accounts of KLA and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The results of operations for the three months ended September 30, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year ending June 30, 2020.
Certain reclassifications have been made to the prior year’s Condensed Consolidated Financial Statements to conform to the current year presentation. The reclassifications did not have material effects on the prior year’s Condensed Consolidated Balance Sheets, Statements of Operations, Comprehensive Income and Cash Flows.
Acquisition of Orbotech, Ltd. On February 20, 2019 (the “Closing Date” or “Acquisition Date”), we completed the acquisition of Orbotech, Ltd. (“Orbotech”) for total consideration of $3.26 billion. The acquisition of Orbotech is referred to as the “Orbotech Acquisition”. The Orbotech Acquisition was accounted for by applying the acquisition method of accounting for business combinations. The unaudited Condensed Consolidated Financial Statements in this report include the financial results of Orbotech prospectively from the Acquisition Date. For additional details, refer to Note 6 “Business Combinations” of the Condensed Consolidated Financial Statements.
Management Estimates. The preparation of the Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in applying our accounting policies that affect the reported amounts of assets and liabilities (and related disclosure of contingent assets and liabilities) at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Comparability. Effective July 1, 2019, we adopted ASC 842, Leases (“ASC 842”). Prior periods were not retrospectively restated, and accordingly, the Consolidated Balance Sheet as of June 30, 2019, and the Condensed Consolidated Statements of Operations for the three months ended September 30, 2018 were prepared using accounting standards that were different than those in effect for the three months ended September 30, 2019.
Significant Accounting Policies. We updated our accounting policies for Leases. There have been no other material changes to our significant accounting policies in Note 1 “Description of Business and Summary of Significant Accounting Policies,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
Leases. Under ASC 842, a contract is or contains a lease when we have the right to control the use of an identified asset for a period of time. We determine if an arrangement is a lease at inception of the contract, which is the date on which the terms of the contract are agreed to, and the agreement creates enforceable rights and obligations. The commencement date of the lease is the date that the lessor makes an underlying asset available for our use. On the commencement date leases are evaluated for classification and assets and liabilities are recognized based on the present value of lease payments over the lease term.
The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised. The right-of-use (“ROU”) asset is initially measured as the amount of lease liability, adjusted for any initial lease costs, prepaid lease payments and any lease incentives. Variable lease payments, consisting primarily of reimbursement of costs incurred by lessors for common area maintenance, real estate taxes, and insurance are not included in the lease liability and are recognized as they are incurred.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate at lease commencement to measure ROU assets and lease liabilities. The incremental borrowing rate used by us is based on baseline rates and adjusted by the credit spreads commensurate with our secured borrowing rate, over a similar term. We used the incremental borrowing rate on June 30, 2019 for all leases that commenced on or prior to that date. Operating lease expense is generally recognized on a straight-line basis over the lease term.
We have elected the practical expedient to account for the lease and non-lease components as a single lease component for the majority of our asset classes. For leases with a term of one year or less, we have elected not to record the ROU asset or liability.
Recent Accounting Pronouncements.
Recently Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASC 842 which supersedes the lease recognition requirements in ASC 840, Leases, (“ASC 840”). The most prominent of the changes in ASC 842 is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases.
Consistent with ASC 840, leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statements of operations. In July 2018, the FASB issued an accounting standard update which amended ASC 842 and offered an additional (and optional) transition method by which entities could elect not to recast the comparative periods presented in financial statements in the period of adoption.
KLA adopted the new standard on July 1, 2019, the first day of fiscal 2020, using the optional adoption method whereby we did not adjust comparative period financial statements. Consequently, prior period balances and disclosures have not been restated. KLA elected certain practical expedients, which among other things, allowed us to carry forward prior conclusions about lease identification and classification. The adoption of ASC 842 resulted in the balance sheet recognition of additional lease assets and lease liabilities of $110.7 million and $108.7 million, respectively, related primarily to facilities, vehicles and other equipment. The adoption of ASC 842 did not have a material impact on beginning retained earnings, the Condensed Consolidated Statement of Operations, Cash Flows, or earnings per share. Additionally, the adoption of ASC 842 did not have a material impact on the Condensed Consolidated Financial Statements for arrangements in which KLA is the lessor. For additional information regarding KLA’s leases, see Note 9 “Leases” in the Condensed Consolidated Financial Statements.
Updates Not Yet Effective
In June 2016, the FASB issued an accounting standard update that changes the accounting for recognizing impairments of financial assets. Under the update, credit losses for certain types of financial instruments will be estimated based on expected losses. The update also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2021, with early adoption permitted starting in the first quarter of fiscal year ending June 30, 2020. We are currently evaluating the impact of this accounting standard update on our Condensed Consolidated Financial Statements.
In August 2018, the FASB issued an accounting standard update which modifies the existing accounting standards for fair value measurement disclosure. This update eliminates the disclosure of the amount of and reasons for transfers between level 1 and level 2 of the fair value hierarchy, and the policy for timing of transfers between levels. This standard update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2021, and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our Condensed Consolidated Financial Statements.
In August 2018, the FASB issued an accounting standard update to amend the disclosure requirements related to defined benefit pension and other post-retirement plans. Some of the changes include adding a disclosure requirement for significant gains and losses related to changes in the benefit obligation for the period and removing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year. This standard update is effective for us for the fiscal year ending June 30, 2021, and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our Condensed Consolidated Financial Statements.
In August 2018, the FASB issued an accounting standard update to align the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance clarifies which costs should be capitalized including the cost to acquire the license and the related implementation costs. This standard update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2021, with an option to be adopted either prospectively or retrospectively. Early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our Condensed Consolidated Financial Statements.
NOTE 2 – REVENUE
Contract Balances
The following table represents the opening and closing balances of accounts receivables, contract assets and contract liabilities for the indicated periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
|
|
(In thousands, except for percentage)
|
September 30, 2019
|
|
July 1, 2019
|
|
$ Change
|
|
% Change
|
Accounts receivable, net
|
$
|
1,066,188
|
|
|
$
|
990,113
|
|
|
$
|
76,075
|
|
|
8
|
%
|
Contract assets
|
$
|
99,068
|
|
|
$
|
94,015
|
|
|
$
|
5,053
|
|
|
5
|
%
|
Contract liabilities
|
$
|
579,761
|
|
|
$
|
587,789
|
|
|
$
|
(8,028
|
)
|
|
(1
|
)%
|
Our payment terms and conditions vary by contract type, although terms generally include a requirement of payment of 70% to 90% of total contract consideration within 30 to 60 days of shipment, with the remainder payable within 30 days of acceptance.
The change in contract assets during the three months ended September 30, 2019 was mainly due to $27.6 million of revenue recognized for which the payment is subject to conditions other than passage of time, partially offset by $22.8 million of contract assets reclassified to net accounts receivable as our right to consideration for these contract assets became unconditional. Contract assets are included in Other current assets on our Condensed Consolidated Balance Sheet.
During the three months ended September 30, 2019, we recognized revenue of $266.8 million that was included in contract liabilities as of July 1, 2019. This was partially offset by the value of products and services billed to customers for which control of the products and service has not transferred to the customers. Contract liabilities are included in current and non-current liabilities on our Condensed Consolidated Balance Sheets.
Remaining Performance Obligations
As of September 30, 2019, we had $2.08 billion of remaining performance obligations, which represents our obligation to deliver products and services, and consists primarily of sales orders where written customer requests have been received. We expect to recognize approximately 5% to 15% of these performance obligations as revenue beyond the next twelve months, subject to risk of delays, pushouts, and cancellation by the customer, usually with limited or no penalties.
Refer to Note 18 “Segment Reporting and Geographic Information” of the Condensed Consolidated Financial Statements for information related to revenue by geographic region as well as significant product and service offerings.
NOTE 3 – FAIR VALUE MEASUREMENTS
Our financial assets and liabilities are measured and recorded at fair value, except for our debt and certain equity investments in privately-held companies. Equity investments without a readily available fair value are accounted for using the measurement alternative. The measurement alternative is calculated as cost minus impairment, if any, plus or minus changes resulting from observable price changes.
Our non-financial assets, such as goodwill, intangible assets, and land, property and equipment, are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred.
Fair Value of Financial Instruments. We have evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The fair value of our cash equivalents, accounts receivable, accounts payable and other current assets and liabilities approximate their carrying amounts due to the relatively short maturity of these items.
Fair Value Hierarchy. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
|
|
|
|
Level 1
|
|
Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
|
|
|
|
Level 2
|
|
Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
|
|
|
|
Level 3
|
|
Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
As of September 30, 2019, the types of instruments valued based on quoted market prices in active markets included money market funds, certain U.S. Treasury securities and U.S. Government agency securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.
The types of instruments valued based on other observable inputs included corporate debt securities, sovereign securities, municipal securities, certain U.S. Treasury and U.S. Government agency securities. The market inputs used to value these instruments generally consist of market yields, reported trades and broker / dealer quotes. Such instruments are generally classified within Level 2 of the fair value hierarchy.
The principal market in which we execute our foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants generally are large financial institutions. Our foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
The fair value of deferred payments and contingent consideration payable, the majority of which were recorded in connection with recent business combinations, were classified as Level 3 and estimated using significant inputs that were not observable in the market. See Note 6 “Business Combinations” of the Condensed Consolidated Financial Statements for additional information.
Financial assets (excluding cash held in operating accounts and time deposits) and liabilities measured at fair value on a recurring basis, as of the date indicated below, were presented on our Condensed Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019 (In thousands)
|
Total
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Little or No Market Activity
Inputs
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
3,903
|
|
|
$
|
—
|
|
|
$
|
3,903
|
|
|
$
|
—
|
|
Money market funds and other
|
399,036
|
|
|
399,036
|
|
|
—
|
|
|
—
|
|
U.S. Government agency securities
|
1,500
|
|
|
—
|
|
|
1,500
|
|
|
—
|
|
U.S. Treasury securities
|
5,995
|
|
|
—
|
|
|
5,995
|
|
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Corporate debt securities
|
416,394
|
|
|
—
|
|
|
416,394
|
|
|
—
|
|
Municipal securities
|
1,906
|
|
|
—
|
|
|
1,906
|
|
|
—
|
|
Sovereign securities
|
6,014
|
|
|
—
|
|
|
6,014
|
|
|
—
|
|
U.S. Government agency securities
|
102,829
|
|
|
102,829
|
|
|
—
|
|
|
—
|
|
U.S. Treasury securities
|
224,519
|
|
|
212,705
|
|
|
11,814
|
|
|
—
|
|
Total cash equivalents and marketable securities(1)
|
1,162,096
|
|
|
714,570
|
|
|
447,526
|
|
|
—
|
|
Other current assets:
|
|
|
|
|
|
|
|
Derivative assets
|
3,608
|
|
|
—
|
|
|
3,608
|
|
|
—
|
|
Other non-current assets:
|
|
|
|
|
|
|
|
Executive Deferred Savings Plan
|
206,235
|
|
|
158,411
|
|
|
47,824
|
|
|
—
|
|
Total financial assets(1)
|
$
|
1,371,939
|
|
|
$
|
872,981
|
|
|
$
|
498,958
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
(2,669
|
)
|
|
$
|
—
|
|
|
$
|
(2,669
|
)
|
|
$
|
—
|
|
Deferred payments
|
(8,800
|
)
|
|
—
|
|
|
—
|
|
|
(8,800
|
)
|
Contingent consideration payable
|
(19,292
|
)
|
|
—
|
|
|
—
|
|
|
(19,292
|
)
|
Total financial liabilities
|
$
|
(30,761
|
)
|
|
$
|
—
|
|
|
$
|
(2,669
|
)
|
|
$
|
(28,092
|
)
|
________________
(1) Excludes cash of $503.5 million held in operating accounts and time deposits of $85.9 million as of September 30, 2019.
Financial assets (excluding cash held in operating accounts and time deposits) and liabilities measured at fair value on a recurring basis, as of the date indicated below, were presented on our Condensed Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019 (In thousands)
|
Total
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Little or No Market Activity
Inputs
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Corporate debt securities
|
$
|
10,988
|
|
|
$
|
—
|
|
|
$
|
10,988
|
|
|
$
|
—
|
|
Money market funds and other
|
352,708
|
|
|
352,708
|
|
|
—
|
|
|
—
|
|
U.S. Government agency securities
|
27,994
|
|
|
—
|
|
|
27,994
|
|
|
—
|
|
U.S. Treasury securities
|
55,858
|
|
|
—
|
|
|
55,858
|
|
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
Corporate debt securities
|
422,089
|
|
|
—
|
|
|
422,089
|
|
|
—
|
|
Municipal securities
|
1,913
|
|
|
—
|
|
|
1,913
|
|
|
—
|
|
Sovereign securities
|
5,994
|
|
|
—
|
|
|
5,994
|
|
|
—
|
|
U.S. Government agency securities
|
131,224
|
|
|
131,224
|
|
|
—
|
|
|
—
|
|
U.S. Treasury securities
|
151,838
|
|
|
151,838
|
|
|
—
|
|
|
—
|
|
Total cash equivalents and marketable securities(1)
|
1,160,606
|
|
|
635,770
|
|
|
524,836
|
|
|
—
|
|
Other current assets:
|
|
|
|
|
|
|
|
Derivative assets
|
2,557
|
|
|
—
|
|
|
2,557
|
|
|
—
|
|
Other non-current assets:
|
|
|
|
|
|
|
|
Executive Deferred Savings Plan
|
207,581
|
|
|
158,021
|
|
|
49,560
|
|
|
—
|
|
Total financial assets(1)
|
$
|
1,370,744
|
|
|
$
|
793,791
|
|
|
$
|
576,953
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
(3,334
|
)
|
|
$
|
—
|
|
|
$
|
(3,334
|
)
|
|
$
|
—
|
|
Deferred payments
|
(8,800
|
)
|
|
—
|
|
|
—
|
|
|
(8,800
|
)
|
Contingent consideration payable
|
(14,005
|
)
|
|
—
|
|
|
—
|
|
|
(14,005
|
)
|
Total financial liabilities
|
$
|
(26,139
|
)
|
|
$
|
—
|
|
|
$
|
(3,334
|
)
|
|
$
|
(22,805
|
)
|
________________
(1) Excludes cash of $479.8 million held in operating accounts and time deposits of $99.0 million as of June 30, 2019.
There were no transfers between Level 1, Level 2 and Level 3 fair value measurements during the three months ended September 30, 2019. See Note 8 “Debt” of the Condensed Consolidated Financial Statements for disclosure of the fair value of our Senior Notes.
NOTE 4 – FINANCIAL STATEMENT COMPONENTS
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
(In thousands)
|
As of
September 30, 2019
|
|
As of
June 30, 2019
|
Accounts receivable, net:
|
|
|
|
Accounts receivable, gross
|
$
|
1,078,051
|
|
|
$
|
1,002,114
|
|
Allowance for doubtful accounts
|
(11,863
|
)
|
|
(12,001
|
)
|
|
$
|
1,066,188
|
|
|
$
|
990,113
|
|
Inventories:
|
|
|
|
Raw materials
|
$
|
449,075
|
|
|
$
|
444,627
|
|
Customer service parts
|
336,809
|
|
|
328,515
|
|
Work-in-process
|
287,951
|
|
|
285,191
|
|
Finished goods
|
180,405
|
|
|
204,167
|
|
|
$
|
1,254,240
|
|
|
$
|
1,262,500
|
|
Other current assets:
|
|
|
|
Contract assets
|
$
|
99,068
|
|
|
$
|
94,015
|
|
Prepaid expenses
|
80,691
|
|
|
88,387
|
|
Deferred costs of revenue
|
65,197
|
|
|
70,721
|
|
Prepaid income and other taxes
|
15,858
|
|
|
51,889
|
|
Other current assets
|
22,985
|
|
|
18,065
|
|
|
$
|
283,799
|
|
|
$
|
323,077
|
|
Land, property and equipment, net:
|
|
|
|
Land
|
$
|
67,876
|
|
|
$
|
67,883
|
|
Buildings and leasehold improvements
|
405,476
|
|
|
402,678
|
|
Machinery and equipment
|
680,970
|
|
|
669,316
|
|
Office furniture and fixtures
|
29,217
|
|
|
28,282
|
|
Construction-in-process
|
56,828
|
|
|
26,029
|
|
|
1,240,367
|
|
|
1,194,188
|
|
Less: accumulated depreciation
|
(765,157
|
)
|
|
(745,389
|
)
|
|
$
|
475,210
|
|
|
$
|
448,799
|
|
Other non-current assets:
|
|
|
|
Executive Deferred Savings Plan(1)
|
$
|
206,235
|
|
|
$
|
207,581
|
|
Operating lease right of use assets
|
105,967
|
|
|
—
|
|
Other non-current assets
|
56,719
|
|
|
58,392
|
|
|
$
|
368,921
|
|
|
$
|
265,973
|
|
Other current liabilities:
|
|
|
|
Compensation and benefits
|
$
|
311,779
|
|
|
$
|
226,462
|
|
Executive Deferred Savings Plan
|
207,873
|
|
|
208,926
|
|
Other accrued expenses
|
163,345
|
|
|
202,647
|
|
Customer credits and advances
|
150,746
|
|
|
133,677
|
|
Income taxes payable
|
86,141
|
|
|
23,350
|
|
Interest payable
|
44,560
|
|
|
31,992
|
|
Operating lease liabilities, current
|
28,855
|
|
|
—
|
|
|
$
|
993,299
|
|
|
$
|
827,054
|
|
Other non-current liabilities:
|
|
|
|
Income taxes payable
|
$
|
358,235
|
|
|
$
|
392,266
|
|
Pension liabilities
|
80,046
|
|
|
79,622
|
|
Operating lease liabilities
|
75,552
|
|
|
—
|
|
Other non-current liabilities
|
129,199
|
|
|
116,009
|
|
|
$
|
643,032
|
|
|
$
|
587,897
|
|
________________
|
|
(1)
|
We have a non-qualified deferred compensation plan (known as “Executive Deferred Savings Plan” or “EDSP”) under which certain employees and non-employee directors may defer a portion of their compensation. The expense associated with changes in the EDSP liability included in selling, general and administrative expense was $1.9 million and $7.5 million during the three months ended September 30, 2019 and 2018, respectively. The amount of net gains associated with changes in the EDSP assets included in selling, general and administrative expense was $2.3 million and $7.4 million during the three months ended September 30, 2019 and 2018, respectively. For additional details, refer to Note 1, “Description of Business and Summary of Significant Accounting Policies,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
|
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) (“OCI”) as of the dates indicated below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Currency Translation Adjustments
|
|
Unrealized Gains (Losses) on Available-for-Sale Securities
|
|
Unrealized Gains (Losses) on Cash Flow Hedges
|
|
Unrealized Gains (Losses) on Defined Benefit Plans
|
|
Total
|
Balance as of September 30, 2019
|
$
|
(46,086
|
)
|
|
$
|
113
|
|
|
$
|
(7,964
|
)
|
|
$
|
(17,918
|
)
|
|
$
|
(71,855
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2019
|
$
|
(44,041
|
)
|
|
$
|
(1,616
|
)
|
|
$
|
(8,725
|
)
|
|
$
|
(18,647
|
)
|
|
$
|
(73,029
|
)
|
The effects on net income (loss) of amounts reclassified from accumulated OCI to the Condensed Consolidated Statement of Operations for the indicated period were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location in the Condensed Consolidated
|
|
Three Months Ended
September 30,
|
Accumulated OCI Components
|
|
Statements of Operations
|
|
2019
|
|
2018
|
Unrealized gains (losses) on cash flow hedges from foreign exchange and interest rate contracts(1)
|
|
Revenues
|
|
$
|
373
|
|
|
$
|
983
|
|
|
|
Costs of revenues and operating expenses
|
|
(1,801
|
)
|
|
(134
|
)
|
|
|
Interest expense
|
|
(99
|
)
|
|
188
|
|
|
|
Net gains (losses) reclassified from accumulated OCI
|
|
$
|
(1,527
|
)
|
|
$
|
1,037
|
|
Unrealized gains (losses) on available-for-sale securities
|
|
Other expense (income), net
|
|
$
|
(4
|
)
|
|
$
|
(481
|
)
|
__________________
|
|
(1)
|
The three months ended September 30, 2019 reflects the new accounting guidance for hedge accounting, which was adopted in the second quarter of fiscal year 2019. For additional details, refer to Note 16, “Derivative Instruments and Hedging Activities” of the Condensed Consolidated Financial Statements.
|
The amounts reclassified out of accumulated OCI related to our defined benefit pension plans, which were recognized as a component of net periodic cost for the three months ended September 30, 2019 and 2018 were $0.2 million, respectively. For additional details, refer to Note 12, “Employee Benefit Plans” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
NOTE 5 – MARKETABLE SECURITIES
The amortized cost and fair value of marketable securities as of the dates indicated below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019 (In thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Corporate debt securities
|
$
|
419,980
|
|
|
$
|
430
|
|
|
$
|
(113
|
)
|
|
$
|
420,297
|
|
Money market funds and other
|
399,036
|
|
|
—
|
|
|
—
|
|
|
399,036
|
|
Municipal securities
|
1,899
|
|
|
7
|
|
|
—
|
|
|
1,906
|
|
Sovereign securities
|
6,014
|
|
|
3
|
|
|
(3
|
)
|
|
6,014
|
|
U.S. Government agency securities
|
104,391
|
|
|
10
|
|
|
(72
|
)
|
|
104,329
|
|
U.S. Treasury securities
|
230,632
|
|
|
120
|
|
|
(238
|
)
|
|
230,514
|
|
Subtotal
|
1,161,952
|
|
|
570
|
|
|
(426
|
)
|
|
1,162,096
|
|
Add: Time deposits(1)
|
85,902
|
|
|
—
|
|
|
—
|
|
|
85,902
|
|
Less: Cash equivalents
|
484,824
|
|
|
—
|
|
|
—
|
|
|
484,824
|
|
Marketable securities
|
$
|
763,030
|
|
|
$
|
570
|
|
|
$
|
(426
|
)
|
|
$
|
763,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019 (In thousands)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Corporate debt securities
|
$
|
433,518
|
|
|
$
|
141
|
|
|
$
|
(582
|
)
|
|
$
|
433,077
|
|
Money market funds and other
|
352,708
|
|
|
—
|
|
|
—
|
|
|
352,708
|
|
Municipal securities
|
1,910
|
|
|
3
|
|
|
—
|
|
|
1,913
|
|
Sovereign securities
|
6,001
|
|
|
1
|
|
|
(8
|
)
|
|
5,994
|
|
U.S. Government agency securities
|
159,454
|
|
|
5
|
|
|
(241
|
)
|
|
159,218
|
|
U.S. Treasury securities
|
208,058
|
|
|
39
|
|
|
(401
|
)
|
|
207,696
|
|
Subtotal
|
1,161,649
|
|
|
189
|
|
|
(1,232
|
)
|
|
1,160,606
|
|
Add: Time deposits(1)
|
99,006
|
|
|
—
|
|
|
—
|
|
|
99,006
|
|
Less: Cash equivalents
|
536,206
|
|
|
17
|
|
|
(2
|
)
|
|
536,221
|
|
Marketable securities
|
$
|
724,449
|
|
|
$
|
172
|
|
|
$
|
(1,230
|
)
|
|
$
|
723,391
|
|
________________
(1) Time deposits excluded from fair value measurements.
Our investment portfolio consists of both corporate and government securities that have a maximum maturity of three years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. Most of our unrealized losses are due to changes in market interest rates and bond yields. We believe that we have the ability to realize the full value of all of these investments upon maturity. As of September 30, 2019, we had 158 investments in an unrealized loss position. The following table summarizes the fair value and gross unrealized losses of our investments that were in an unrealized loss position as of the date indicated below, $260.4 million of which were in a continuous loss position for 12 months or more:
|
|
|
|
|
|
|
|
|
As of September 30, 2019 (In thousands)
|
Fair Value
|
|
Gross
Unrealized
Losses
|
Corporate debt securities
|
$
|
182,963
|
|
|
$
|
(112
|
)
|
Sovereign securities
|
1,997
|
|
|
(3
|
)
|
U.S. Government agency securities
|
79,082
|
|
|
(72
|
)
|
U.S Treasury securities
|
167,750
|
|
|
(239
|
)
|
Total
|
$
|
431,792
|
|
|
$
|
(426
|
)
|
The contractual maturities of securities classified as available-for-sale, regardless of their classification on our Condensed Consolidated Balance Sheets, as of the date indicated below were as follows:
|
|
|
|
|
|
|
|
|
As of September 30, 2019 (In thousands)
|
Amortized Cost
|
|
Fair Value
|
Due within one year
|
$
|
442,133
|
|
|
$
|
441,938
|
|
Due after one year through three years
|
320,897
|
|
|
321,236
|
|
|
$
|
763,030
|
|
|
$
|
763,174
|
|
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Realized gains and losses on available-for-sale securities for the three months ended September 30, 2019 and 2018 were immaterial.
NOTE 6 - BUSINESS COMBINATIONS
Fiscal 2020 Acquisition
On August 22, 2019, we acquired the outstanding shares of a privately-held company, primarily to expand our products and services offerings, for a total purchase consideration of $93.9 million, including the fair value of the promise to pay an additional consideration up to $60.0 million contingent on the achievement of certain revenue milestones. As of September 30, 2019, the estimated fair value of the additional consideration was $9.2 million, which was classified as a non-current liability on the Condensed Consolidated Balance Sheets.
We have included the financial results of the acquisition completed during the first quarter of the fiscal year 2020 in our Condensed Consolidated Financial Statements from the date of acquisition. These results were not material to our Condensed Consolidated Financial Statements.
The purchase price of the fiscal 2020 acquisition was allocated on a preliminary basis as follows:
|
|
|
|
|
(In thousands)
|
Fair Value
|
Net tangible assets (including cash and cash equivalents of $6.6 million)
|
$
|
7,196
|
|
Deferred tax liabilities
|
(15,265
|
)
|
Intangible assets
|
47,931
|
|
Goodwill
|
54,001
|
|
Total
|
$
|
93,863
|
|
The purchase price allocation is preliminary and as additional information becomes available, we may further revise the preliminary purchase price allocation during the remainder of the measurement period, which will not exceed 12 months from the closing of the acquisition.
The $54.0 million of goodwill was assigned to the Wafer Inspection and Patterning reporting units. None of the goodwill recognized is deductible for income tax purposes.
Fiscal 2019 Acquisitions
Orbotech Acquisition
On February 20, 2019, we completed the acquisition of Orbotech for total purchase consideration of approximately $3.26 billion which was paid in part by cash of $1.90 billion, in part by KLA common stock with a fair value of $1.32 billion and the balance by the assumption of stock options and RSUs. Orbotech is a global supplier of yield-enhancing and process-enabling solutions for the manufacture of electronics products. KLA acquired Orbotech to extend and enhance its portfolio of products to address market opportunities in the printed circuit board, flat panel display, advanced packaging and semiconductor manufacturing areas.
Preliminary Purchase Price Allocation
The total purchase consideration has been preliminarily allocated as follows (in thousands):
|
|
|
|
|
Purchase Price
|
|
Cash for outstanding Orbotech shares(1)
|
$
|
1,901,948
|
|
Fair value of KLA common stock issued for outstanding Orbotech shares(2)
|
1,324,657
|
|
Cash for Orbotech equity awards(3)
|
9,543
|
|
Fair value of KLA common stock issued to settle Orbotech equity awards(4)
|
6,129
|
|
Stock options and RSUs assumed(5)
|
13,281
|
|
Total purchase consideration
|
3,255,558
|
|
Less: cash acquired
|
(215,640
|
)
|
Total purchase consideration, net of cash acquired
|
$
|
3,039,918
|
|
|
|
Allocation
|
|
Accounts receivable, net
|
$
|
200,517
|
|
Inventories
|
330,325
|
|
Contract assets
|
63,181
|
|
Other current assets
|
73,561
|
|
Property, plant and equipment, net
|
102,197
|
|
Goodwill
|
1,809,625
|
|
Intangible assets
|
1,553,570
|
|
Other non-current assets
|
73,179
|
|
Accounts payable
|
(53,015
|
)
|
Accrued liabilities
|
(178,849
|
)
|
Other current liabilities(6)
|
(69,449
|
)
|
Deferred tax liabilities(7)
|
(777,838
|
)
|
Other non-current liabilities(6)
|
(67,901
|
)
|
Non-controlling interest
|
(19,185
|
)
|
|
$
|
3,039,918
|
|
________________
|
|
(1)
|
Represents the total cash paid to settle 48.9 million outstanding Orbotech shares as of February 20, 2019 at $38.86 per Orbotech share.
|
|
|
(2)
|
Represents the fair value of 12.2 million shares of our common stock issued to settle 48.9 million outstanding Orbotech shares. KLA issued 0.25 shares for each Orbotech share. The fair value of KLA’s common stock was $108.26 per share on the Acquisition Date.
|
|
|
(3)
|
Represents primarily cash consideration for the settlement of the vested stock options and restricted stock units for which services were rendered by the employees of Orbotech prior to the closing, and a small portion for the settlement of fractional shares.
|
|
|
(4)
|
Represents the fair value of share of 56,614 shares of KLA common stock issued to settle the vested Orbotech stock options. The fair value of KLA’s common stock was $108.26 per share on the Acquisition Date.
|
|
|
(5)
|
Represents the fair value of the assumed stock options and RSUs to the extent those related to services provided by the employee of Orbotech prior to closing. Also refer to Note 10, “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest” of the Condensed Consolidated Financial Statements for additional information about assumed stock options and RSUs.
|
|
|
(6)
|
On December 24, 2018, Orbotech, as part of its strategy to invest in the high growth area of the software business within the Printed Circuit Boards (“PCB”) industry, acquired the remaining 50% shares of Frontline, which was prior to that accounted as an equity investee, from Mentor Graphics Development Services (Israel) Ltd. Orbotech acquired all of the joint venture interests it did not previously own for $85.0 million in cash on hand and agreed to pay an additional $10.0 million in cash over four years plus a cash earn-out of not less than $5.0 million and up to $20.0 million. The earn out amounts are based on revenues from a Frontline product currently under development. As of February 20, 2019, the estimated fair market values of the four-year cash payment and the earn-out were $8.8 million and $7.1 million, respectively, and these amounts have been included in current and non-current liabilities at $4.3 million and $11.6 million respectively. As of September 30, 2019, the estimated fair market values of the four-year cash payment and the earn-out were $8.8 million and $3.2 million, respectively, and these amounts have been included in current and non-current liabilities at $4.3 million and $7.7 million respectively.
|
|
|
(7)
|
Primarily related to tax impact on the future amortization of intangible assets acquired and inventory fair value adjustments.
|
During the first quarter of the fiscal year ended June 30, 2020, we recorded measurement period adjustments to reflect facts and circumstances in existence as of the Acquisition Date. These adjustments primarily related to the valuation of individually immaterial net tangible assets of $2.1 million with corresponding decrease to goodwill.
KLA allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the preliminary estimates of their estimated fair values, which were determined using generally accepted valuation techniques based on estimates and assumptions made by management at the time of the Orbotech Acquisition and are subject to change during the measurement period which is not expected to exceed one year. The primary tasks that are required to be completed include discovery and the remeasurement of unknown uncertain tax positions that existed at the Acquisition Date, adjustments to the deferred tax liabilities for unremitted earnings, validation of synergies expected to be derived from the acquisition of Orbotech, recoverability of certain acquired assets and reallocation of certain acquired intangible assets between jurisdictions based on the outcome of ongoing tax audits, including any related tax impacts. Any adjustments to our preliminary purchase price allocation identified during the measurement period will be recognized in the period in which the adjustments are determined and recorded against goodwill.
The operating results of Orbotech have been included in our Condensed Consolidated Financial Statements for the three months ended September 30, 2019. The goodwill was primarily attributable to the assembled workforce of Orbotech, planned growth in new markets and synergies expected to be achieved from the combined operations of KLA and Orbotech. None of the goodwill is deductible for income tax purposes. Goodwill arising from the Orbotech Acquisition has been allocated to the Specialty Semiconductor Process; and the PCB and Display reporting units during the fiscal year ended June 30, 2019. For additional details, refer to Note 7 “Goodwill and Purchased Intangible Assets” of the Consolidated Financial Statements included in our Annual Report Form 10-K for the fiscal year ended June 30, 2019.
Intangible Assets
The estimated fair value and weighted average useful life of the Orbotech intangible assets are as follows:
|
|
|
|
|
|
|
(In thousands)
|
Fair Value
|
|
Weighted Average Useful Lives (in years)
|
Existing technology(1)
|
$
|
1,008,000
|
|
|
8
|
Customer-related assets(2)
|
227,000
|
|
|
8
|
Backlog(3)
|
37,500
|
|
|
1
|
Trade name(4)
|
91,500
|
|
|
7
|
Off market leases(5)
|
2,070
|
|
|
7
|
Total identified finite-lived intangible assets
|
1,366,070
|
|
|
|
In-process research and development(6)
|
187,500
|
|
|
N/A
|
Total identified intangible assets
|
$
|
1,553,570
|
|
|
|
________________
|
|
(1)
|
Existing technology was identified from the products of Orbotech and its fair value was determined using the Relief-from-Royalty Method under the income approach, which estimates the cost savings generated by a company related to the ownership of an asset for which it would otherwise have had to pay royalties or license fees on revenues earned through the use of the asset. The discount rate used was determined at the time of measurement based on an analysis of the implied internal rate of return of the transaction, weighted average cost of capital and weighted average return on assets. The economic useful life was determined based on the technology cycle related to each developed technology, as well as the cash flows over the forecast period.
|
|
|
(2)
|
Customer contracts and related relationships represent the fair value of the existing relationships with the Orbotech customers and its fair value was determined using the Multi-Period Excess Earning Method which involves isolating the net earnings attributable to the asset being measured based on present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. The economic useful life was determined based on historical customer attrition rates.
|
|
|
(3)
|
Backlog primarily relates to the dollar value of purchase arrangements with customers, effective, as of a given point in time, that are based on mutually agreed terms which, in some cases, may still be subject to completion of written documentation and may be changed or canceled by the customer, often without penalty. Orbotech’s backlog consists of these arrangements with assigned shipment dates expected, in most cases, within three to twelve months. The fair value was determined using the Multi-Period Excess Earning Method. The economic useful life is based on the time to fulfill the outstanding order backlog obligation.
|
|
|
(4)
|
Trade name primarily relates to the “Orbotech” trade name. The fair value was determined by applying the Relief-from-Royalty Method under the income approach. The economic useful life was determined based on the expected life of the trade name.
|
|
|
(5)
|
The favorable / unfavorable components of the acquired leases were determined using the Income Approach which involves present valuing the difference in future cash flows between the contracted lease payments and the rent payable to a market participant over the lease terms. The economic useful life is based on the remaining lease term.
|
|
|
(6)
|
The fair value of in-process research and development (“IPR&D”) was determined using the relief-from-royalty method under the income approach, which estimates the cost savings generated by a company related to the ownership of an asset for which it would otherwise have had to pay royalties or license fees on revenues earned through the use of the asset.
|
We believe the amounts of purchased intangible assets recorded above represent the fair values of and approximate the amounts a market participant would pay for, these intangible assets as of the Acquisition Date.
Other Fiscal 2019 Acquisitions
During the three months ended March 31, 2019 we acquired three privately-held companies primarily to expand our products and services offerings for an aggregate purchase price of $118.3 million, including a post-closing working capital adjustment, and the fair value of the promise to pay additional consideration of up to $13.0 million contingent on the achievement of certain milestones. As of September 30, 2019, the estimated fair value of the additional consideration was $5.3 million, which was classified as a non-current liability on the Condensed Consolidated Balance Sheets.
During the three months ended September 30, 2018 we acquired two privately-held companies for an aggregate purchase price of $15.4 million, including the fair value of the promise to pay total additional consideration of up to $6.0 million contingent on the achievement of certain milestones. As of September 30, 2019, the estimated fair value of the
additional consideration was $1.7 million, which is classified as a non-current liability on the Condensed Consolidated Balance Sheets.
None of these acquisitions were individually material to our Condensed Consolidated Financial Statements.
The aggregate purchase price of the other fiscal 2019 acquisitions was allocated on a preliminary basis as follows:
|
|
|
|
|
(In thousands)
|
Fair Value
|
Net tangible assets (including Cash and cash equivalents of $2.6 million)
|
$
|
13,214
|
|
Identifiable intangible assets
|
75,130
|
|
Goodwill
|
45,380
|
|
Total
|
$
|
133,724
|
|
The goodwill was primarily assigned to the Wafer Inspection and Patterning, and GSS reporting units, and mainly attributable to the assembled workforce, and planned growth in new markets. A portion of the goodwill is deductible for income tax purposes.
Supplemental Unaudited Pro Forma Information:
The following unaudited pro forma financial information summarizes the combined results of operations for KLA, Orbotech, and the three acquisitions completed in the third quarter of fiscal 2019 as if the companies were combined as of the beginning of fiscal 2018. The unaudited pro forma information includes adjustments to amortization and depreciation for intangible assets and property, plant and equipment acquired, adjustments to stock-based compensation expense, the purchase accounting effect on inventory acquired, the purchase accounting effect on deferred revenue, interest expense and amortization of debt issuance costs associated with the Senior Notes financing, and transaction costs.
The table below reflects the impact of material and nonrecurring adjustments to the unaudited pro forma results for the three months ended, September 30, 2018 that are directly attributable to the acquisitions:
|
|
|
|
|
|
Three Months Ended
|
Non-recurring Adjustments (In thousands)
|
September 30, 2018
|
Decrease / (increase) to revenue as a result of deferred revenue fair value adjustment
|
$
|
—
|
|
(Decrease) / increase to expense as a result of inventory fair value adjustment
|
$
|
478
|
|
(Decrease) / increase to expense as a result of transaction costs
|
$
|
(4,898
|
)
|
(Decrease) / increase to expense as a result of compensation costs
|
$
|
2,811
|
|
The unaudited pro forma information presented below is for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business had the acquisitions actually occurred at the beginning of fiscal year 2018 or of the results of our future operations of the combined businesses.
|
|
|
|
|
|
Pro Forma
|
|
Three Months Ended
|
(In thousands)
|
September 30, 2018
|
Revenues
|
$
|
1,348,197
|
|
Net income attributable to KLA
|
$
|
376,634
|
|
We have not included pro forma results of operations for the acquisition of privately-held companies completed in the first quarter of fiscal 2019 or the first quarter of fiscal 2020 herein as they were not material to us on either an individual or in aggregate. We included the results of operations of each acquisition in our Condensed Consolidated Statements of Operations from the date of each acquisition.
NOTE 7 – GOODWILL AND PURCHASED INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in the current and prior business combinations. We have four reportable segments and six reporting units. For additional details, refer to Note 18, “Segment Reporting and Geographic Information” of the Condensed Consolidated Financial
Statements. The following table presents goodwill carrying value and the movements during the three months ended September 30, 2019(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Wafer Inspection and Patterning
|
|
Global Service and Support (“GSS”)
|
|
Specialty Semiconductor Process
|
|
PCB and Display
|
|
Component Inspection
|
|
Total
|
Balance as of June 30, 2019
|
|
$
|
360,615
|
|
|
$
|
25,908
|
|
|
$
|
821,842
|
|
|
$
|
989,918
|
|
|
$
|
13,575
|
|
|
$
|
2,211,858
|
|
Acquired goodwill
|
|
54,001
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54,001
|
|
Foreign currency and other adjustments
|
|
(35
|
)
|
|
—
|
|
|
—
|
|
|
(2,135
|
)
|
|
—
|
|
|
(2,170
|
)
|
Balance as of September 30, 2019
|
|
$
|
414,581
|
|
|
$
|
25,908
|
|
|
$
|
821,842
|
|
|
$
|
987,783
|
|
|
$
|
13,575
|
|
|
$
|
2,263,689
|
|
_________________
|
|
(1)
|
No goodwill was assigned to the Other reporting unit, and accordingly was excluded in the table above.
|
As of September 30, 2019, there have been no significant events or circumstances affecting the valuation of goodwill subsequent to the qualitative assessment performed in the third and fourth quarters of the fiscal year ended June 30, 2019. For additional details, refer to Note 7 “Goodwill and Purchased Intangible Assets,” of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019. The next annual assessment of goodwill by reporting unit is scheduled to be performed in the third quarter of the fiscal year ending June 30, 2020.
Purchased Intangible Assets
The components of purchased intangible assets as of the dates indicated below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
As of
September 30, 2019
|
|
As of
June 30, 2019
|
Category
|
Range of
Useful
Lives
(in years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization,
and Impairment
|
|
Net
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
and
Impairment
|
|
Net
Amount
|
Existing technology
|
4-8
|
|
$
|
1,251,277
|
|
|
$
|
232,203
|
|
|
$
|
1,019,074
|
|
|
$
|
1,224,629
|
|
|
$
|
196,582
|
|
|
$
|
1,028,047
|
|
Trade name / Trademark
|
4-7
|
|
117,133
|
|
|
28,537
|
|
|
88,596
|
|
|
114,573
|
|
|
25,052
|
|
|
89,521
|
|
Customer relationships
|
4-9
|
|
305,028
|
|
|
74,511
|
|
|
230,517
|
|
|
297,250
|
|
|
66,471
|
|
|
230,779
|
|
Backlog and other
|
<1-9
|
|
50,393
|
|
|
30,014
|
|
|
20,379
|
|
|
43,969
|
|
|
19,146
|
|
|
24,823
|
|
Intangible assets subject to amortization
|
|
|
1,723,831
|
|
|
365,265
|
|
|
1,358,566
|
|
|
1,680,421
|
|
|
307,251
|
|
|
1,373,170
|
|
In-process research and development
|
|
|
190,635
|
|
|
—
|
|
|
190,635
|
|
|
187,500
|
|
|
—
|
|
|
187,500
|
|
Total
|
|
|
$
|
1,914,466
|
|
|
$
|
365,265
|
|
|
$
|
1,549,201
|
|
|
$
|
1,867,921
|
|
|
$
|
307,251
|
|
|
$
|
1,560,670
|
|
Purchased intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The change in the gross carrying amounts of intangible assets is due to acquisition of certain assets and liabilities of privately-held companies. For additional details, refer to Note 6 “Business Combinations” of the Condensed Consolidated Financial Statements.
Amortization expense for purchased intangible assets for the periods indicated below was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30,
|
(In thousands)
|
2019
|
|
2018
|
Amortization expense - Cost of revenues
|
$
|
35,621
|
|
|
$
|
890
|
|
Amortization expense - Selling, general and administrative
|
22,256
|
|
|
544
|
|
Amortization expense - Research and development
|
31
|
|
|
—
|
|
Total
|
$
|
57,908
|
|
|
$
|
1,434
|
|
Based on the purchased intangible assets gross carrying amount recorded as of September 30, 2019, the underlying assets, the remaining estimated annual amortization expense is expected to be as follows:
|
|
|
|
|
Fiscal year ending June 30:
|
Amortization
(In thousands)
|
2020 (remaining 9 months)
|
$
|
161,422
|
|
2021
|
194,901
|
|
2022
|
192,323
|
|
2023
|
191,271
|
|
2024
|
188,714
|
|
2025 and thereafter
|
429,935
|
|
Total
|
$
|
1,358,566
|
|
NOTE 8 – DEBT
The following table summarizes our debt as of September 30, 2019 and June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
As of June 30, 2019
|
|
Amount
(In thousands)
|
|
Effective
Interest Rate
|
|
Amount
(In thousands)
|
|
Effective
Interest Rate
|
Fixed-rate 3.375% Senior Notes due on November 1, 2019
|
$
|
250,000
|
|
|
3.377
|
%
|
|
$
|
250,000
|
|
|
3.377
|
%
|
Fixed-rate 4.125% Senior Notes due on November 1, 2021
|
500,000
|
|
|
4.128
|
%
|
|
500,000
|
|
|
4.128
|
%
|
Fixed-rate 4.650% Senior Notes due on November 1, 2024
|
1,250,000
|
|
|
4.682
|
%
|
|
1,250,000
|
|
|
4.682
|
%
|
Fixed-rate 5.650% Senior Notes due on November 1, 2034
|
250,000
|
|
|
5.670
|
%
|
|
250,000
|
|
|
5.670
|
%
|
Fixed-rate 4.100% Senior Notes due on March 15, 2029
|
800,000
|
|
|
4.159
|
%
|
|
800,000
|
|
|
4.159
|
%
|
Fixed-rate 5.000% Senior Notes due on March 15, 2049
|
400,000
|
|
|
5.047
|
%
|
|
400,000
|
|
|
5.047
|
%
|
Total
|
3,450,000
|
|
|
|
|
3,450,000
|
|
|
|
Unamortized discount
|
(8,528
|
)
|
|
|
|
(8,738
|
)
|
|
|
Unamortized debt issuance costs
|
(17,342
|
)
|
|
|
|
(17,880
|
)
|
|
|
Total
|
$
|
3,424,130
|
|
|
|
|
$
|
3,423,382
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
$
|
250,000
|
|
|
|
|
$
|
249,999
|
|
|
|
Long-term debt
|
3,174,130
|
|
|
|
|
3,173,383
|
|
|
|
Total
|
$
|
3,424,130
|
|
|
|
|
$
|
3,423,382
|
|
|
|
As of September 30, 2019, future principal payments for our debt are $250.0 million for the remaining nine months in fiscal year 2020; $500.0 million in fiscal year 2022; and $2.70 billion after fiscal year 2023.
Senior Notes:
In March 2019 and November 2014, we issued $1.20 billion and $2.50 billion, respectively (each, a “2019 Senior Notes”, a “2014 Senior Notes”, and collectively the “Senior Notes”), aggregate principal amount of senior, unsecured long-term notes.
The interest rate specified for each series of the 2014 Senior Notes will be subject to adjustments from time to time if Moody’s Investor Service, Inc. (“Moody’s”) or Standard & Poor’s Ratings Services (“S&P”) or, under certain circumstances, a substitute rating agency selected by us as a replacement for Moody’s or S&P, as the case may be (a “Substitute Rating Agency”), downgrades (or subsequently upgrades) its rating assigned to the respective series of the 2014 Senior Notes such that the adjusted rating is below investment grade. For additional details, refer to Note 8 “Debt” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019. Unlike the 2014 Senior Notes, the interest rate for each series of the 2019 Senior Notes will not be subject to such adjustments. During the fiscal year ended June 30, 2018, we entered into a series of forward contracts (the “2018 Rate Lock Agreements”) to lock the benchmark interest rate with notional amount of $500.0 million in aggregate. In October 2014, we entered into a series of forward contracts to lock the 10-year treasury rate (“benchmark rate”) on a portion of the 2014 Senior Notes with a notional amount of $1.00 billion in aggregate. For additional details on the forward contracts, refer to Note 16, “Derivative Instruments and Hedging Activities” of the Condensed Consolidated Financial Statements.
The original discounts on the 2019 Senior Notes and the 2014 Senior Notes amounted to $6.7 million and $4.0 million, respectively and are being amortized over the life of the debt. Interest is payable semi-annually on May 1 and November 1 of each year for the 2014 Senior Notes and semi-annually on March 15 and September 15 of each year for the 2019 Senior Notes. The indenture for the Senior Notes (the “Indenture”) includes covenants that limit our ability to grant liens on our facilities and enter into sale and leaseback transactions, subject to certain allowances under which certain sale and leaseback transactions are not restricted.
In certain circumstances involving a change of control followed by a downgrade of the rating of a series of Senior Notes by at least two of Moody’s, S&P and Fitch Inc., unless we have exercised our rights to redeem the Senior Notes of such series, we will be required to make an offer to repurchase all or, at the holder’s option, any part, of each holder’s Senior Notes of that series pursuant to the offer described below (the “Change of Control Offer”). In the Change of Control Offer, we will be required to offer payment in cash equal to 101% of the aggregate principal amount of Senior Notes repurchased plus accrued and unpaid interest, if any, on the Senior Notes repurchased, up to, but not including, the date of repurchase.
Based on the trading prices of the Senior Notes on the applicable dates, the fair value of the Senior Notes as of September 30, 2019 and June 30, 2019 was approximately $3.82 billion and $3.70 billion, respectively. While the Senior Notes are recorded at cost, the fair value of the long-term debt was determined based on quoted prices in markets that are not active; accordingly, the long-term debt is categorized as Level 2 for purposes of the fair value measurement hierarchy.
As of September 30, 2019, we were in compliance with all of our covenants under the Indenture associated with the Senior Notes.
Revolving Credit Facility:
In November 2017, we entered into a Credit Agreement (the “Credit Agreement”) providing for a $750.0 million five-year unsecured Revolving Credit Facility (the “Revolving Credit Facility”), which replaced our prior Credit Facility. Subject to the terms of the Credit Agreement, the Revolving Credit Facility may be increased in an amount up to $250.0 million in the aggregate. In November 2018, we entered into an Incremental Facility, Extension and Amendment Agreement (the “Amendment”), which amends the Credit Agreement to (a) extend the Maturity Date (the “Maturity Date”) from November 30, 2022 to November 30, 2023, (b) increase the total commitment by $250.0 million and (c) effect certain other amendments to the Credit Agreement as set forth in the Amendment. After giving effect to the Amendment, the total commitments under the Credit Agreement are $1.00 billion.
We may borrow, repay and reborrow funds under the Revolving Credit Facility until the Maturity Date, at which time such Revolving Credit Facility will terminate, and all outstanding loans under such facility, together with all accrued and unpaid interest, must be repaid. We may prepay outstanding borrowings under the Revolving Credit Facility at any time without a prepayment penalty.
Borrowings under the Revolving Credit Facility will bear interest, at our option, at either: (i) the Alternative Base Rate (“ABR”) plus a spread, which ranges from 0 bps to 75 bps, or (ii) the London Interbank Offered Rate (“LIBOR”) plus a spread, which ranges from 100 bps to 175 bps. The spreads under ABR and LIBOR are subject to adjustment in conjunction with credit rating downgrades or upgrades. We are also obligated to pay an annual commitment fee on the daily undrawn balance of the Revolving Credit Facility, which ranges from 10 bps to 25 bps, subject to an adjustment in conjunction with changes to our credit rating. As of September 30, 2019, we pay an annual commitment fee of 12.5 bps on the daily undrawn balance of the Revolving Credit Facility.
The Revolving Credit Facility requires us to maintain an interest expense coverage ratio as described in the Credit Agreement, on a quarterly basis, covering the trailing four consecutive fiscal quarters of no less than 3.50 to 1.00. In addition, we are required to maintain the maximum leverage ratio as described in the Credit Agreement, on a quarterly basis of 3.00 to 1.00, covering the trailing four consecutive fiscal quarters for each fiscal quarter, which can be increased to 4.00 to 1.00 for a period of time in connection with a material acquisition or a series of material acquisitions. As of September 30, 2019, our maximum allowed leverage ratio was 4.00 to 1.00 following the Orbotech Acquisition.
We were in compliance with all covenants under the Credit Agreement as of September 30, 2019 and had no outstanding borrowings under the unfunded Revolving Credit Facility.
NOTE 9– LEASES
We have operating leases for facilities, vehicles, and other equipment. Our facility leases are primarily used for administrative functions, research and development, manufacturing, and storage and distribution. Our finance leases are not material.
Our existing leases do not contain significant restrictive provisions or residual value guarantees; however, certain leases contain provisions for payment of maintenance, real estate taxes, or insurance costs by us. Our leases have remaining lease terms ranging from less than one year to eleven years, including periods covered by options to extend the lease when it is reasonably certain that the option will be exercised.
Total lease expense for the three months ended September 30, 2019 was $8.7 million and included $0.2 million of costs related to short term leases which are not recorded on the Condensed Consolidated Balance Sheets. At September 30, 2019, the weighted average remaining lease term and weighted average discount rate for operating leases was 5.2 years and 1.7%, respectively.
Supplemental cash flow information related to leases was as follows:
|
|
|
|
Three months ended September 30, 2019
|
Amount
(In thousands)
|
Operating cash outflows from operating leases
|
8,374
|
|
ROU assets obtained in exchange for new operating lease liabilities
|
2,805
|
|
Maturities of lease liabilities as of September 30, 2019 were as follows:
|
|
|
|
Fiscal year ending June 30,
|
Amount
(In thousands)
|
2020 (remaining 9 months)
|
23,347
|
|
2021
|
24,802
|
|
2022
|
18,374
|
|
2023
|
12,827
|
|
2024
|
8,760
|
|
2025 and thereafter
|
20,856
|
|
Total lease payments
|
108,966
|
|
Less imputed interest
|
(4,559
|
)
|
Total
|
104,407
|
|
As of September 30, 2019, we did not have material leases that had not yet commenced.
As of June 30, 2019, future minimum lease payments as defined under the previous lease accounting guidance of ASC 840 under noncancelable operating leases were as follows:
|
|
|
|
|
Fiscal year ending June 30,
|
Amount
(In thousands)
|
2020
|
$
|
30,296
|
|
2021
|
22,250
|
|
2022
|
16,217
|
|
2023
|
11,878
|
|
2024
|
7,912
|
|
2025 and thereafter
|
15,018
|
|
Total minimum lease payments
|
$
|
103,571
|
|
NOTE 10 – EQUITY, LONG-TERM INCENTIVE COMPENSATION PLANS AND NON-CONTROLLING INTEREST
Equity Incentive Program
As of September 30, 2019, we had 10.8 million shares available for issuance under our 2004 Equity Incentive Plan (the “2004 Plan”).
For details of the 2004 Plan refer to Note 9 “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
Assumed Equity Plans
As of the Orbotech Acquisition Date, we assumed outstanding equity incentive awards under the following Orbotech equity incentive plans: (i) Equity Remuneration Plan for Key Employees of Orbotech Ltd. and its Affiliates and Subsidiaries (as Amended and Restated in 2005), (ii) 2010 Equity-Based Incentive Plan, and (iii) 2015 Equity-Based Incentive Plan (each, an “Assumed Equity Plan” and collectively the “Assumed Equity Plans”).
As of September 30, 2019, there were 10,651 and 432,372 shares of our common stock underlying the outstanding Assumed Options and RSUs, respectively, under the Assumed Equity Plans. The weighted-average remaining contractual terms, the aggregate intrinsic values, and the weighted average exercise price for the stock options outstanding under the Assumed Equity Plans as of September 30, 2019 were 4.75 years, $0.6 million, and $63.08 per share, respectively. During the three months ended September 30, 2019, there were 3,907 Assumed Options exercised with a weighted-average exercise price of $29.26.
For details on the Assumed Equity Plans refer to Note 9 “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
Equity Incentive Plans - General Information
The following table summarizes the combined activity under our equity incentive plans:
|
|
|
|
(In thousands)
|
Available
For Grant(1) (2)
|
Balance as of June 30, 2019
|
11,613
|
|
Restricted stock units granted(3)
|
(782
|
)
|
Restricted stock units canceled
|
16
|
|
Balance as of September 30, 2019
|
10,847
|
|
__________________
|
|
(1)
|
The number of RSUs reflects the application of the award multiplier of 2.0x to calculate the impact of the award on the shares reserved under the 2004 Plan.
|
|
|
(2)
|
No additional stock options, RSUs or other awards will be granted under the Assumed Equity Plans.
|
|
|
(3)
|
Includes RSUs granted to senior management during the three months ended September 30, 2019 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such RSUs that are deemed to have been earned) (“performance-based RSUs”). This line item includes all such performance-based RSUs granted during the three months ended September 30, 2019 reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied (0.4 million shares for the three months ended September 30, 2019 reflects the application of the multiplier described above).
|
The fair value of stock-based awards is measured at the grant date and is recognized as an expense over the employee’s requisite service period. For RSUs granted without “dividend equivalent” rights, fair value is calculated using the closing price of our common stock on the grant date, adjusted to exclude the present value of dividends which are not accrued on those RSUs. The fair value for RSUs granted with “dividend equivalent” rights is determined using the closing price of our common stock on the grant date. The fair value for purchase rights under our Employee Stock Purchase Plan is determined using a Black-Scholes model.
The following table shows stock-based compensation expense for the indicated periods:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(In thousands)
|
2019
|
|
2018
|
Stock-based compensation expense by:
|
|
|
|
Costs of revenues
|
$
|
2,864
|
|
|
$
|
1,831
|
|
Research and development
|
5,287
|
|
|
2,519
|
|
Selling, general and administrative
|
18,793
|
|
|
11,788
|
|
Total stock-based compensation expense
|
$
|
26,944
|
|
|
$
|
16,138
|
|
The following table shows stock-based compensation capitalized as inventory as of the dates indicated below:
|
|
|
|
|
|
|
|
|
(In thousands)
|
As of
September 30, 2019
|
|
As of
June 30, 2019
|
Inventory
|
$
|
4,909
|
|
|
$
|
4,819
|
|
Restricted Stock Units
The following table shows the activity and weighted-average grant date fair value for RSUs during the three months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
Shares(1)
(In thousands)
|
|
Weighted-Average
Grant Date
Fair Value
|
Outstanding restricted stock units as of June 30, 2019(2)
|
2,902
|
|
|
$
|
91.84
|
|
Granted(3)
|
391
|
|
|
$
|
136.76
|
|
Vested and released
|
(276
|
)
|
|
$
|
67.32
|
|
Withheld for taxes
|
(171
|
)
|
|
$
|
67.32
|
|
Forfeited
|
(16
|
)
|
|
$
|
104.14
|
|
Outstanding restricted stock units as of September 30, 2019(2)
|
2,830
|
|
|
$
|
101.85
|
|
__________________
|
|
(1)
|
Share numbers reflect actual shares subject to awarded RSUs.
|
|
|
(2)
|
Includes performance-based and market-based RSUs.
|
|
|
(3)
|
This line item includes performance-based RSUs granted during the three months ended September 30, 2019 reported at the maximum possible number of shares that may ultimately be issuable if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied (0.2 million shares for the three months ended September 30, 2019.)
|
The RSUs granted by us generally vest (a) with respect to awards with only service-based vesting criteria, over periods ranging from two to four years and (b) with respect to awards with both performance-based and service-based vesting criteria, in two equal installments on the third and fourth anniversaries of the grant date and (c) with respect to awards with both market-based and service-based vesting criteria in three equal installments on the third, fourth and fifth anniversaries of the grant date, in each case subject to the recipient remaining employed by us as of the applicable vesting date. The RSUs granted to the independent members of the Board of Directors vest annually.
The following table shows the weighted-average grant date fair value per unit for the RSUs granted, vested, and tax benefits realized by us in connection with vested and released RSUs for the indicated periods:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(In thousands, except for weighted-average grant date fair value)
|
2019
|
|
2018
|
Weighted-average grant date fair value per unit
|
$
|
136.76
|
|
|
$
|
118.47
|
|
Grant date fair value of vested restricted stock units
|
$
|
30,092
|
|
|
$
|
36,072
|
|
Tax benefits realized by us in connection with vested and released restricted stock units
|
$
|
3,993
|
|
|
$
|
6,918
|
|
As of September 30, 2019, the unrecognized stock-based compensation expense balance related to RSUs was $206.2 million, excluding the impact of estimated forfeitures, and will be recognized over a weighted-average remaining contractual term and an estimated weighted-average amortization period of 1.8 years. The intrinsic value of outstanding RSUs as of September 30, 2019 was $451.2 million.
Cash-Based Long-Term Incentive Compensation
We have adopted a cash-based long-term incentive (“Cash LTI Plan”) program for many of our employees as part of our employee compensation program. Executives and non-employee members of the Board of Directors are not participating in this program. During the three months ended September 30, 2019 and 2018, we approved Cash LTI awards of $1.8 million and $2.8 million, respectively under our Cash LTI Plan. Cash LTI awards issued to employees under the Cash LTI Plan will vest in three or four equal installments, with one-third or one-fourth of the aggregate amount of the Cash LTI award vesting on each anniversary of the grant date over a three or four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by us as of the applicable award vesting date. During the three months ended September 30, 2019 and 2018, we recognized $16.6 million and $15.2 million, respectively, in compensation expense under the Cash LTI Plan. As of September 30, 2019, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $134.2 million. For details, refer to Note 9 “Equity, Long-Term Incentive Compensation Plans and Non-Controlling Interest,” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
Employee Stock Purchase Plan
Our Employee Stock Purchase Plan (“ESPP”) provides that eligible employees may contribute up to 15% of their eligible earnings toward the semi-annual purchase of our common stock. The ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the date of purchase (or, if not a trading day, on the immediately preceding trading day).
The offering period (or length of the look-back period) under the ESPP has a duration of six months, and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to 85% of the lesser of (i) the fair market value of our common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of our common stock on the purchase date. We estimate the fair value of purchase rights under the ESPP using a Black-Scholes model.
The fair value of each purchase right under the ESPP was estimated on the date of grant using the Black-Scholes model and the straight-line attribution approach with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
2019
|
|
2018
|
Stock purchase plan:
|
|
|
|
Expected stock price volatility
|
31.6
|
%
|
|
30.0
|
%
|
Risk-free interest rate
|
2.4
|
%
|
|
1.9
|
%
|
Dividend yield
|
2.5
|
%
|
|
2.9
|
%
|
Expected life (in years)
|
0.5
|
|
|
0.5
|
|
The following table shows total cash received from employees for the issuance of shares under the ESPP, the number of shares purchased by employees through the ESPP, the tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP and the weighted-average fair value per share for the indicated periods:
|
|
|
|
|
|
|
|
|
(In thousands, except for weighted-average fair value per share)
|
Three Months Ended
September 30,
|
2019
|
|
2018
|
Total cash received from employees for the issuance of shares under the ESPP
|
$
|
—
|
|
|
$
|
—
|
|
Number of shares purchased by employees through the ESPP
|
—
|
|
|
—
|
|
Tax benefits realized by us in connection with the disqualifying dispositions of shares purchased under the ESPP
|
$
|
1,734
|
|
|
$
|
511
|
|
Weighted-average fair value per share based on Black-Scholes model
|
$
|
27.35
|
|
|
$
|
22.73
|
|
The ESPP shares are replenished annually on the first day of each fiscal year by virtue of an evergreen provision. The provision allows for share replenishment equal to the lesser of 2.0 million shares or the number of shares which we estimate will be required to be issued under the ESPP during the forthcoming fiscal year. As of September 30, 2019, a total of 2.6 million shares were reserved and available for issuance under the ESPP.
Quarterly cash dividends
On August 1, 2019, our Board of Directors declared a regular quarterly cash dividend of $0.75 per share on the outstanding shares of our common stock, which was paid on September 3, 2019 to the stockholders of record as of the close of business on August 15, 2019. The total amount of regular quarterly cash dividends and dividend equivalents paid during the three months ended September 30, 2019 and 2018 was $121.6 million and $119.9 million, respectively. The amount of accrued dividends equivalents payable for regular quarterly cash dividends on unvested RSUs with dividend equivalent rights as of September 30, 2019 and June 30, 2019 was $6.4 million and $7.3 million, respectively. These amounts will be paid upon vesting of the underlying RSUs.
Non-controlling Interest
We have consolidated the results of Orbotech LT Solar, LLC (“OLTS”) and Orbograph Ltd. (“Orbograph”), in which we own approximately 84% and 94% of the outstanding equity interest, respectively. OLTS is engaged in the research, development and marketing of products for the deposition of thin film coating of various materials on crystalline silicon photovoltaic wafers for solar energy panels through plasma-enhanced chemical vapor deposition (“PECVD”). Orbograph is engaged in the development and marketing of character recognition solutions to banks, financial and other payment processing institutions and healthcare providers.
Additionally, we have consolidated the results of PixCell, an Israeli company developing diagnostic equipment for point-of-care hematology applications of which we own approximately 52% of the outstanding equity interest and are entitled to appoint the majority of this company’s directors.
NOTE 11 – STOCK REPURCHASE PROGRAM
Our Board of Directors has authorized a program which permits us to repurchase shares of our common stock. The intent of this program is to offset the dilution from our equity incentive plans, employee stock purchase plan, the issuance of shares in the Orbotech Acquisition, as well as to return excess cash to our stockholders. Subject to market conditions, applicable legal requirements and other factors, the repurchases were made in the open market in compliance with applicable securities laws, including the Securities Exchange Act of 1934 and the rules promulgated thereunder, such as Rule 10b-18 and Rule 10b5-1. This stock repurchase program has no expiration date and may be suspended at any time. On September 17, 2019, our Board of Directors authorized us to repurchase an additional $1.00 billion of our common stock. As of September 30, 2019, an aggregate of approximately $1.63 billion was available for repurchase under our stock repurchase program.
Share repurchases for the indicated periods (based on the trade date of the applicable repurchase) were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(In thousands)
|
2019
|
|
2018
|
Number of shares of common stock repurchased
|
1,659
|
|
|
2,781
|
|
Total cost of repurchases
|
$
|
228,496
|
|
|
$
|
307,787
|
|
As of September 30, 2019, we had repurchased 50 thousand shares for $8.0 million, for which repurchases had not settled prior to September 30, 2019. The amount was recorded as a component of other current liabilities for the period presented.
NOTE 12 – NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by using the weighted-average number of common shares outstanding during the period, increased to include the number of additional shares of common stock that would have been outstanding if the shares of common stock underlying our outstanding dilutive restricted stock units had been issued. The dilutive effect of outstanding restricted stock units is reflected in diluted net income per share by application of the treasury stock method.
The following table sets forth the computation of basic and diluted net income per share attributable to KLA:
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
Three Months Ended
September 30,
|
2019
|
|
2018
|
Numerator:
|
|
|
|
Net income attributable to KLA
|
$
|
346,525
|
|
|
$
|
395,944
|
|
Denominator:
|
|
|
|
Weighted-average shares-basic, excluding unvested restricted stock units
|
158,697
|
|
|
155,221
|
|
Effect of dilutive restricted stock units and options
|
1,434
|
|
|
862
|
|
Weighted-average shares-diluted
|
160,131
|
|
|
156,083
|
|
Basic net income per share attributable to KLA
|
$
|
2.18
|
|
|
$
|
2.55
|
|
Diluted net income per share attributable to KLA
|
$
|
2.16
|
|
|
$
|
2.54
|
|
Anti-dilutive securities excluded from the computation of diluted net income per share
|
—
|
|
|
207
|
|
NOTE 13 – INCOME TAXES
The following table provides details of income taxes:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(Dollar amounts in thousands)
|
2019
|
|
2018
|
Income before income taxes
|
$
|
371,516
|
|
|
$
|
427,568
|
|
Provision for income taxes
|
$
|
25,120
|
|
|
$
|
31,624
|
|
Effective tax rate
|
6.8
|
%
|
|
7.4
|
%
|
Our effective tax rate is lower than the U.S. federal statutory rate primarily due to the proportion of earnings generated in jurisdictions with tax rates lower than the U.S. statutory rate.
In the normal course of business, we are subject to examination by tax authorities throughout the world. We completed the U.S. federal income tax examination for the fiscal year ended June 30, 2016 and are subject to U.S. federal income tax examinations for all years beginning from the fiscal year ended June 30, 2017. We are subject to state income tax examinations for all years beginning from the fiscal year ended June 30, 2015. We are also subject to examinations in other major foreign jurisdictions, including Singapore and Israel, for all years beginning from the calendar year ended December 31, 2012. We are under audit in Germany related to Orbotech for the years ended December 31, 2013 to December 31, 2015.
It is possible that certain examinations may be concluded in the next twelve months. The timing and resolution of income tax examinations is uncertain. The amounts paid, if any, upon resolution of issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although it is possible that our balance of gross unrecognized tax benefits could materially change in the next 12 months, we are unable to estimate the full range of possible adjustments to this balance given the uncertainty in the development of ongoing income tax examinations.
In May 2017, Orbotech received an assessment from the Israel Tax Authority (“ITA”) with respect to its fiscal years 2012 through 2014 (the “Assessment”, and the “Audit Period”, respectively), for an aggregate amount of tax, after offsetting all net operating losses (“NOLs”) available through the end of 2014, of approximately NIS 229.0 million (equivalent to approximately $66.0 million which includes related interest and linkage differentials to the Israeli consumer price index as of date of the issuance of the Tax Decrees, as defined below).
On August 31, 2018, Orbotech filed an objection in respect of the tax assessment (the “Objection”). The ITA completed the second stage of the audit, in which the claims Orbotech raised in the Objection were examined by different personnel at the ITA. In addition, the ITA examined additional items during this second stage of the audit. As Orbotech and the ITA did not reach an agreement during the second stage, the ITA issued Tax Decrees to Orbotech on August 28, 2019 (“Tax Decrees”) for an aggregate amount of tax, after offsetting all NOLs available through the end of 2014, of approximately NIS 257 million (equivalent to approximately $74 million which includes related interest and linkage differentials to the Israeli consumer price index as of the date of the issuance of the Tax Decrees). These Tax Decrees replaced the Assessment. We believe that our recorded unrecognized tax benefits are sufficient to cover the resolution of these Tax Decrees.
Orbotech filed a notice of appeal with respect to the above Tax Decrees with the District Court of Tel Aviv on September 26, 2019. The ITA and Orbotech have agreed to extend the filing of the ITA's arguments in support of the Tax Decrees to February 28, 2020. The ITA and Orbotech are continuing discussions in an effort to resolve this matter in a mutually agreeable manner.
In connection with the above, there is an ongoing criminal investigation in Israel against Orbotech, certain of its employees and its tax consultant. On April 11, 2018, Orbotech received a “suspect notification letter” (dated March 28, 2018) from the Tel Aviv District Attorney’s Office (Fiscal and Financial). In the letter, it was noted that the investigation file was transferred from the Assessment Investigation Officer to the District Attorney’s Office. The letter further states that the District Attorney’s Office has not yet made a decision regarding submission of an indictment against Orbotech; and that if after studying the case, a decision is made to consider prosecuting Orbotech, Orbotech will receive an additional letter, and within 30 days, Orbotech may present its arguments to the District Attorney’s Office as to why it should not be indicted. On October 27, 2019, we received a request for additional information from the District Attorney's Office. We will continue to monitor the progress of the District Attorney’s Office investigation, however, we cannot anticipate when the review of the case will be completed and what will be the results thereof. We intend to cooperate with the District Attorney’s Office to enable them to conclude their investigation.
NOTE 14 – LITIGATION AND OTHER LEGAL MATTERS
We are named from time to time as a party to lawsuits and other types of legal proceedings and claims in the normal course of our business. Actions filed against us include commercial, intellectual property, customer, and labor and employment related claims, including complaints of alleged wrongful termination and potential class action lawsuits regarding alleged violations of federal and state wage and hour and other laws. In general, legal proceedings and claims, regardless of their merit, and associated internal investigations (especially those relating to intellectual property or confidential information disputes) are often expensive to prosecute, defend or conduct and may divert management’s attention and other company resources. Moreover, the results of legal proceedings are difficult to predict, and the costs incurred in litigation can be substantial, regardless of outcome. We believe the amounts provided in our Condensed Consolidated Financial Statements are adequate in light of the probable and estimated liabilities. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable, and there can be no assurances that the actual amounts required to satisfy alleged liabilities from the matters described above will not exceed the amounts reflected in our Condensed Consolidated Financial Statements or will not have a material adverse effect on our results of operations, financial condition or cash flows.
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Factoring. We have agreements (referred to as “factoring agreements”) with financial institutions to sell certain of our trade receivables and promissory notes from customers without recourse. We do not believe we are at risk for any material losses as a result of these agreements. In addition, we periodically sell certain letters of credit (“LCs”), without recourse, received from customers in payment for goods and services.
The following table shows total receivables sold under factoring agreements and proceeds from sales of LCs for the indicated periods:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(In thousands)
|
2019
|
|
2018
|
Receivables sold under factoring agreements
|
$
|
56,420
|
|
|
$
|
61,540
|
|
Proceeds from sales of LCs
|
$
|
9,929
|
|
|
$
|
10,892
|
|
Factoring and LC fees for the sale of certain trade receivables were recorded in other expense (income), net and were not material for the periods presented.
Purchase Commitments. We maintain commitments to purchase inventory from our suppliers as well as goods, services, and other assets in the ordinary course of business. Our liability under these purchase commitments is generally restricted to a forecasted time-horizon as mutually agreed upon between the parties. This forecasted time-horizon can vary among different suppliers. Our estimate of our significant purchase commitments for primarily material, services, supplies and asset purchases is approximately $643.5 million as of September 30, 2019, which are primarily due within the next 12 months.
Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation penalties.
Cash Long-Term Incentive Plan. As of September 30, 2019, we have committed $176.0 million for future payment obligations under our Cash LTI Plan. The calculation of compensation expense related to the Cash LTI Plan includes estimated forfeiture rate assumptions. Cash LTI awards issued to employees under the Cash LTI Plan vest in three or four equal installments, with one-third or one-fourth of the aggregate amount of the Cash LTI award vesting on each anniversary of the grant date over a three or four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by us as of the applicable award vesting date.
Guarantees and Contingencies. We maintain guarantee arrangements available through various financial institutions for up to $49.2 million, of which $43.0 million had been issued as of September 30, 2019, primarily to fund guarantees to customs authorities for value-added tax (“VAT”) and other operating requirements of our subsidiaries in Europe, Israel and Asia.
Indemnification Obligations. Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees with respect to certain litigation matters and investigations that arise in connection with their service to us. These obligations arise under the terms of our certificate of incorporation, our bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that we are required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. For example, we have paid or reimbursed legal expenses incurred in connection with the investigation of our historical stock option practices and the related litigation and government inquiries by several of our current and former directors, officers and employees. Although the maximum potential amount of future payments we could be required to make under the indemnification obligations generally described in this paragraph is theoretically unlimited, we believe the fair value of this liability, to the extent estimable, is appropriately considered within the reserve we have established for currently pending legal proceedings.
We are a party to a variety of agreements pursuant to which we may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which we customarily agrees to hold the other party harmless against losses arising from, or provides customers with other remedies to protect against, bodily injury or damage to personal property caused by our products, non-compliance with our product performance specifications, infringement by our products of third-party intellectual property rights and a breach of warranties, representations and covenants related to matters such as title to assets sold, validity of certain intellectual property rights, non-infringement of third-party rights, and certain income tax-related matters. In each of these circumstances, payment by us is typically subject to the other party making a claim to and cooperating with us pursuant to the procedures specified in the particular contract. This usually allows us to challenge the other party’s claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third-party claims brought against the other party. Further, our obligations under these agreements may be limited in terms of amounts, activity (typically at our option to replace or correct the products or terminate the agreement with a refund to the other party), and duration. In some instances, we may have recourse against third parties and/or insurance covering certain payments made by us.
In addition, we may in limited circumstances enter into agreements that contain customer-specific commitments on pricing, tool reliability, spare parts stocking levels, response time and other commitments. Furthermore, we may give these customers limited audit or inspection rights to enable them to confirm that we are complying with these commitments. If a customer elects to exercise its audit or inspection rights, we may be required to expend significant resources to support the audit or inspection, as well as to defend or settle any dispute with a customer that could potentially arise out of such audit or inspection. To date, we have made no significant accruals in our Condensed Consolidated Financial Statements for this contingency. While we have not in the past incurred significant expenses for resolving disputes regarding these types of commitments, we cannot make any assurance that it will not incur any such liabilities in the future.
It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material effect on our business, financial condition, results of operations or cash flows.
NOTE 16 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The authoritative guidance requires companies to recognize all derivative instruments and hedging activities, including foreign currency exchange contracts and interest rate lock agreements, (collectively “derivatives”) as either assets or liabilities at fair value on the Condensed Consolidated Balance Sheets. In accordance with the accounting guidance, we designate foreign currency exchange contracts and interest rate lock agreements as cash flow hedges of certain forecasted foreign currency denominated sales, purchase and spending transactions, and the benchmark interest rate of the corresponding debt financing, respectively.
Our foreign subsidiaries operate and sell our products in various global markets. As a result, we are exposed to risks relating to changes in foreign currency exchange rates. We utilize foreign currency forward exchange contracts and option contracts to hedge against future movements in foreign exchange rates that affect certain existing and forecasted foreign currency denominated sales and purchase transactions, such as the Japanese yen, the euro, the pound sterling and the Israeli new shekel. We routinely hedge our exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. These currency forward exchange contracts and options, designated as cash flow hedges, generally have maturities of less than 18 months. Cash flow hedges are evaluated for effectiveness monthly, based on changes in total fair value of the derivatives. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience material losses.
In October 2014, we entered into a series of forward contracts (“Rate Lock Agreements”) to lock the benchmark rate on a portion of the Senior Notes. The Rate Lock Agreements had a notional amount of $1.00 billion in aggregate which matured in the second quarter of the fiscal year ended June 30, 2015. The Rate Lock Agreements were terminated on the date of the pricing of the $1.25 billion of 4.650% Senior Notes due in 2024 and we recorded the fair value of $7.5 million as a gain within accumulated other comprehensive income (loss) (“OCI”) as of December 31, 2014. We recognized $0.2 million for each of the three months ended September 30, 2019 and 2018, for the amortization of the gain recognized in accumulated other comprehensive income (loss), which amount reduced the interest expense. As of September 30, 2019, the unamortized portion of the fair value of the forward contracts for the Rate Lock Agreements was $3.8 million. For more details, refer to Note 16, “Derivative Instruments and Hedging Activities” of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
During the fiscal year ended June 30, 2018, we entered into a series of forward contracts (the “2018 Rate Lock Agreements”) to lock the benchmark interest rate prior to expected debt issuances. The objective of the 2018 Rate Lock Agreements was to hedge the risk associated with the variability in interest rates due to the changes in the benchmark rate leading up to the closing of the intended financing on the notional amount being hedged. The 2018 Rate Lock Agreement had a notional amount of $500.0 million in aggregate, which matured and terminated in the third quarter of fiscal year ending June 30, 2019 and we recorded the fair value of $13.6 million as a loss within OCI. We recognized $0.3 million amortization of the loss recognized in accumulated OCI, which increased the interest expense for the three months ended September 30, 2019. As of September 30, 2019, the unamortized portion of the fair value of the 2018 Rate Lock Agreements was $13.0 million.
For derivatives that are designated and qualify as cash flow hedges, the effective portion of the gains or losses is reported in OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Prior to adopting the new accounting guidance for hedge accounting, time value was excluded from the assessment of effectiveness for derivatives designated as cash flow hedges. Time value was amortized on a mark-to-market basis and recognized in earnings over the life of the derivative contract. For derivative contracts executed after adopting the new accounting guidance, the election to include time value for the assessment of effectiveness is made on all forward contracts designated as cash flow hedges. The change in fair value of the derivative are recorded in OCI until the hedged item is recognized in earnings. The assessment of effectiveness of options contracts designated as cash flow hedges continue to exclude time value after adopting the new accounting guidance. The initial value of the component excluded from the assessment of effectiveness are recognized in earnings over the life of the derivative contract. Any difference between change in the fair value of the excluded components and the amounts recognized in earnings are recorded in OCI.
For derivatives that are not designated as cash flow hedges, gains and losses are recognized in other expense (income), net. We use foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivative instruments are largely offset by the changes in the fair value of the assets or liabilities being hedged.
Derivatives in Cash Flow Hedging Relationships: Foreign Exchange and Interest Rate Contracts
The gains (losses) on derivatives in cash flow hedging relationships recognized in OCI for the indicated periods were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30,
|
(In thousands)
|
2019
|
|
2018
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
Foreign exchange contracts:
|
|
|
|
Amounts included in the assessment of effectiveness
|
$
|
(740
|
)
|
|
$
|
13,794
|
|
Amounts excluded from the assessment of effectiveness
|
$
|
(2
|
)
|
|
$
|
—
|
|
The locations and amounts of designated and non-designated derivative’s gains and losses reported in the Condensed Consolidated Statements of Operations for the indicated periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
2019
|
|
2018
|
(In thousands)
|
Revenue
|
|
Cost of Revenues and Operating Expenses
|
|
Interest Expense
|
|
Other Expense (Income), Net
|
|
Revenue
|
|
Cost of Revenues
|
|
Interest Expense
|
|
Other Expense (Income), Net
|
Total amounts presented in the Condensed Consolidated Statement of Operations in which the effects of cash flow hedges are recorded
|
$
|
1,413,414
|
|
|
$
|
1,003,166
|
|
|
$
|
40,350
|
|
|
$
|
(1,618
|
)
|
|
$
|
1,093,260
|
|
|
$
|
381,387
|
|
|
$
|
26,362
|
|
|
$
|
(10,025
|
)
|
Gains (losses) on Derivatives Designated as Hedging Instruments:
|
Rate lock agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gains (losses) reclassified from accumulated OCI to earnings
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(99
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gains (losses) reclassified from accumulated OCI to earnings
|
$
|
475
|
|
|
$
|
(1,801
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
983
|
|
|
$
|
(134
|
)
|
|
$
|
188
|
|
|
$
|
—
|
|
Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach
|
$
|
(102
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Amount excluded from the assessment of effectiveness
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
229
|
|
Gains (losses) on Derivatives Not Designated as Hedging Instruments:
|
Amount of gains (losses) recognized in earnings
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,325
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,763
|
|
The U.S. dollar equivalent of all outstanding notional amounts of foreign currency hedge contracts, with maximum remaining maturities of approximately ten months as of the dates indicated below were as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
As of
September 30, 2019
|
|
As of
June 30, 2019
|
Cash flow hedge contracts - foreign currency
|
|
|
|
Purchase
|
$
|
26,488
|
|
|
$
|
31,108
|
|
Sell
|
$
|
117,761
|
|
|
$
|
113,226
|
|
Other foreign currency hedge contracts
|
|
|
|
Purchase
|
$
|
228,271
|
|
|
$
|
257,614
|
|
Sell
|
$
|
280,226
|
|
|
$
|
273,061
|
|
The locations and fair value of our derivatives reported in our Condensed Consolidated Balance Sheets as of the dates indicated below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Balance Sheet
Location
|
|
As of
September 30, 2019
|
|
As of
June 30, 2019
|
|
Balance Sheet
Location
|
|
As of
September 30, 2019
|
|
As of
June 30, 2019
|
(In thousands)
|
|
Fair Value
|
|
|
Fair Value
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
608
|
|
|
397
|
|
|
Other current liabilities
|
|
824
|
|
|
2,097
|
|
Total derivatives designated as hedging instruments
|
|
|
608
|
|
|
397
|
|
|
|
|
824
|
|
|
2,097
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Other current assets
|
|
3,000
|
|
|
2,160
|
|
|
Other current liabilities
|
|
1,845
|
|
|
1,237
|
|
Total derivatives not designated as hedging instruments
|
|
|
3,000
|
|
|
2,160
|
|
|
|
|
1,845
|
|
|
1,237
|
|
Total derivatives
|
|
|
$
|
3,608
|
|
|
$
|
2,557
|
|
|
|
|
$
|
2,669
|
|
|
$
|
3,334
|
|
The changes in OCI, before taxes, related to derivatives for the indicated periods were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(In thousands)
|
2019
|
|
2018
|
Beginning balance
|
$
|
(10,791
|
)
|
|
$
|
2,346
|
|
Amount reclassified to earnings
|
1,527
|
|
|
(1,037
|
)
|
Net change in unrealized gains or losses
|
(742
|
)
|
|
13,794
|
|
Ending balance
|
$
|
(10,006
|
)
|
|
$
|
15,103
|
|
Offsetting of Derivative Assets and Liabilities
We present derivatives at gross fair values in the Condensed Consolidated Balance Sheets. We have entered into arrangements with each of our counterparties, which reduce credit risk by permitting net settlement of transactions with the same counterparty under certain conditions. The information related to the offsetting arrangements for the periods indicated was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
|
|
|
|
Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
|
|
|
Description
|
|
Gross Amounts of Derivatives
|
|
Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets
|
|
Net Amount of Derivatives Presented in the Condensed Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Received
|
|
Net Amount
|
Derivatives - Assets
|
|
$
|
3,608
|
|
|
$
|
—
|
|
|
$
|
3,608
|
|
|
$
|
(2,027
|
)
|
|
$
|
—
|
|
|
$
|
1,581
|
|
Derivatives - Liabilities
|
|
$
|
(2,669
|
)
|
|
$
|
—
|
|
|
$
|
(2,669
|
)
|
|
$
|
2,027
|
|
|
$
|
—
|
|
|
$
|
(642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
|
|
|
|
Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
|
|
|
Description
|
|
Gross Amounts of Derivatives
|
|
Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets
|
|
Net Amount of Derivatives Presented in the Condensed Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Received
|
|
Net Amount
|
Derivatives - Assets
|
|
$
|
2,557
|
|
|
$
|
—
|
|
|
$
|
2,557
|
|
|
$
|
(1,397
|
)
|
|
$
|
—
|
|
|
$
|
1,160
|
|
Derivatives - Liabilities
|
|
$
|
(3,334
|
)
|
|
$
|
—
|
|
|
$
|
(3,334
|
)
|
|
$
|
1,397
|
|
|
$
|
—
|
|
|
$
|
(1,937
|
)
|
NOTE 17– RELATED PARTY TRANSACTIONS
During the three months ended September 30, 2019 and 2018, we purchased from, or sold to, several entities, where one or more of our executive officers or members of our Board of Directors, or their immediate family members, were, during the periods presented, an executive officer or a board member of a subsidiary, including Anaplan, Inc. Citrix Systems, Inc., Keysight Technologies, Inc., and NetApp, Inc. The following table provides the transactions with these parties for the indicated periods (for the portion of such period that they were considered related):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
(In thousands)
|
2019
|
|
2018
|
Total revenues
|
$
|
1,041
|
|
|
$
|
2
|
|
Total purchases
|
$
|
465
|
|
|
$
|
603
|
|
Our receivable balances from these parties were $1.8 million at September 30, 2019 and immaterial as of June 30, 2019. Our payable balances from these parties were immaterial at September 30, 2019 and June 30, 2019.
NOTE 18 – SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. Our CODM is our Chief Executive Officer.
We have four reportable segments: Semiconductor Process Control; Specialty Semiconductor Process; PCB, Display and Component Inspection; and Other. The reportable segments are determined based on several factors including, but not limited to, customer base, homogeneity of products, technology, delivery channels and similar economic characteristics.
Semiconductor Process Control
The Semiconductor Process Control (“SPC”) segment offers comprehensive portfolio of inspection, metrology and data analytics products, and related service, which helps integrated circuit manufacturers achieve target yield throughout the entire semiconductor fabrication process-from research and development (“R&D”) to final volume production. Our differentiated products and services are designed to provide comprehensive solutions that help our customers accelerate development and production ramp cycles, achieve higher and more stable semiconductor die yields and improve their overall profitability. This reportable segment is comprised of two operating segments.
Specialty Semiconductor Process
The Specialty Semiconductor Manufacturing segment develops and sells advanced vacuum deposition and etching process tools, which are used by a broad range of specialty semiconductor customers, including manufacturers of microelectromechanical systems (“MEMS”), radio frequency (“RF”) communication chips, and power semiconductors for automotive and industrial applications. This reportable segment is comprised of one operating segment.
PCB, Display and Component Inspection
The PCB, Display and Component Inspection segment enable electronic device manufacturers to inspect, test and measure printed circuit boards (“PCBs”), flat panel displays (“FPDs”) and ICs to verify their quality, pattern the desired electronic circuitry on the relevant substrate and perform three-dimensional shaping of metalized circuits on multiple surfaces. This segment also engages in the development and marketing of character recognition solutions to banks, financial and other payment processing institutions and healthcare providers. This reportable segment is comprised of two operating segments.
Other
We engage in the research, development and marketing of products for the deposition of thin film coating of various materials on crystalline silicon photovoltaic wafers for solar energy panels. This reportable segment is comprised of one operating segment.
The CODM assesses the performance of each operating segment and allocates resources to those segments based on total revenue and segment gross margin and does not evaluate the segments using discrete asset information. Segment gross margin excludes corporate allocations and effects of foreign exchange rates, amortization of intangible assets, amortization of inventory fair value adjustments, and transaction costs associated with our acquisitions related to costs of revenues.
The following is a summary of results for each of our four reportable segments for the indicated periods:
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
(In thousands)
|
2019
|
|
2018
|
Semiconductor Process Control:
|
|
|
|
Revenue
|
$
|
1,163,632
|
|
|
$
|
1,069,959
|
|
Segment gross margin
|
$
|
742,342
|
|
|
$
|
702,231
|
|
Specialty Semiconductor Process:
|
|
|
|
Revenue
|
$
|
69,139
|
|
|
$
|
—
|
|
Segment gross margin
|
$
|
38,164
|
|
|
$
|
—
|
|
PCB, Display and Component Inspection:
|
|
|
|
Revenue
|
$
|
178,552
|
|
|
$
|
23,615
|
|
Segment gross margin
|
$
|
76,068
|
|
|
$
|
10,533
|
|
Other:
|
|
|
|
Revenue
|
$
|
2,231
|
|
|
$
|
—
|
|
Segment gross margin
|
$
|
653
|
|
|
$
|
—
|
|
Totals:
|
|
|
|
Revenue
|
$
|
1,413,554
|
|
|
$
|
1,093,574
|
|
Segment gross margin
|
$
|
857,227
|
|
|
$
|
712,764
|
|
The following table reconciles total reportable segment revenue to total revenue for the indicated periods:
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
(In thousands)
|
2019
|
|
2018
|
Total revenue for reportable segments
|
$
|
1,413,554
|
|
|
$
|
1,093,574
|
|
Corporate allocations and effects of foreign exchange rates
|
(140
|
)
|
|
(314
|
)
|
Total revenue
|
$
|
1,413,414
|
|
|
$
|
1,093,260
|
|
The following table reconciles total segment gross margin to total income before income taxes for the indicated periods:
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
(In thousands)
|
2019
|
|
2018
|
Total segment gross margin
|
$
|
857,227
|
|
|
$
|
712,764
|
|
Acquisition-related charges, corporate allocations, and effects of foreign exchange rates(1)
|
48,054
|
|
|
891
|
|
Research and development
|
210,580
|
|
|
153,530
|
|
Selling, general and administrative
|
188,345
|
|
|
114,438
|
|
Interest expense
|
40,350
|
|
|
26,362
|
|
Other expense (income), net
|
(1,618
|
)
|
|
(10,025
|
)
|
Income before income taxes
|
$
|
371,516
|
|
|
$
|
427,568
|
|
__________________
|
|
(1)
|
Acquisition-related charges primarily include amortization of intangible assets, amortization of inventory fair value adjustments, and other acquisition-related costs classified or presented as part of costs of revenues.
|
Our significant operations outside the United States include manufacturing facilities in China, Germany, Israel and Singapore and sales, marketing and service offices in Japan, the rest of the Asia Pacific region and Europe. For geographical revenue reporting, revenues are attributed to the geographic location in which the customer is located. Long-lived assets consist of land, property and equipment, net and are attributed to the geographic region in which they are located.
The following is a summary of revenues by geographic region, based on ship-to location, for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
Three Months Ended September 30,
|
2019
|
|
2018
|
Revenues:
|
|
|
|
|
|
|
|
Taiwan
|
$
|
386,729
|
|
|
27
|
%
|
|
$
|
254,437
|
|
|
23
|
%
|
China
|
345,856
|
|
|
24
|
%
|
|
340,134
|
|
|
31
|
%
|
Japan
|
206,211
|
|
|
15
|
%
|
|
135,578
|
|
|
12
|
%
|
Korea
|
197,450
|
|
|
14
|
%
|
|
153,501
|
|
|
14
|
%
|
North America
|
181,983
|
|
|
13
|
%
|
|
102,129
|
|
|
9
|
%
|
Europe and Israel
|
59,383
|
|
|
4
|
%
|
|
71,669
|
|
|
7
|
%
|
Rest of Asia
|
35,802
|
|
|
3
|
%
|
|
35,812
|
|
|
4
|
%
|
Total
|
$
|
1,413,414
|
|
|
100
|
%
|
|
$
|
1,093,260
|
|
|
100
|
%
|
The following is a summary of revenues by major products for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
Three Months Ended September 30,
|
2019
|
|
2018
|
Revenues:
|
|
|
|
|
|
|
|
Wafer Inspection
|
$
|
448,274
|
|
|
32
|
%
|
|
$
|
447,292
|
|
|
41
|
%
|
Patterning
|
382,658
|
|
|
27
|
%
|
|
304,001
|
|
|
28
|
%
|
Specialty Semiconductor Process
|
56,870
|
|
|
4
|
%
|
|
—
|
|
|
—
|
%
|
PCB, Display and Component Inspection
|
120,360
|
|
|
9
|
%
|
|
20,835
|
|
|
2
|
%
|
Services
|
355,439
|
|
|
25
|
%
|
|
264,033
|
|
|
24
|
%
|
Other
|
49,813
|
|
|
3
|
%
|
|
57,099
|
|
|
5
|
%
|
Total
|
$
|
1,413,414
|
|
|
100
|
%
|
|
$
|
1,093,260
|
|
|
100
|
%
|
Wafer Inspection, and Patterning products are offered in Semiconductor Process Control segment. Services are offered in multiple segments. Other includes primarily refurbished systems, remanufactured legacy systems, and enhancements and upgrades for previous-generation products which are part of Semiconductor Process Control segment.
In the three months ended September 30, 2019, two customers accounted for approximately 17% and 12% of total revenues. In the three months ended September 30, 2018, two customers accounted for approximately 15% and 10% of total revenues. One customer on an individual basis accounted for greater than 10% of net accounts receivables at September 30, 2019 and June 30, 2019.
Land, property and equipment, net by geographic region as of the dates indicated below were as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
As of
September 30, 2019
|
|
As of
June 30, 2019
|
Land, property and equipment, net:
|
|
|
|
United States
|
$
|
279,293
|
|
|
$
|
253,255
|
|
Singapore
|
52,778
|
|
|
49,523
|
|
Israel
|
63,250
|
|
|
66,082
|
|
Europe
|
61,302
|
|
|
62,027
|
|
Rest of Asia
|
18,587
|
|
|
17,912
|
|
Total
|
$
|
475,210
|
|
|
$
|
448,799
|
|
NOTE 19 – RESTRUCTURING CHARGES
In September 2019, management approved a plan to streamline our organization and business processes that included the reduction of workforce, which is expected to be completed in the second half of our fiscal year 2021, primarily in our PCB, Display and Component Inspection segment, and a potential disposition of our solar energy business in our Other segment. Restructuring charges were immaterial for the three months ended September 30, 2019. Proceeds from disposition of our solar energy business are not expected to be material.
We expect to incur additional restructuring charges, including additional severance costs and other related costs in future periods in connection with the completion of our workforce reduction.